Circular economy - What is the new EU regulation CSRD asking companies to do?
Circular economy (CE) is an economic concept that takes inspiration from the natural systems where nothing is waste but rather a part of a new cycle. Contrary to the linear economy of “take-make-use-dispose”, where the natural ecosystem is both the source and the sink of materials, the CE aims to minimize the extraction and the disposal, by maximizing material’s value within a closed loop.
When a product is designed to be durable, easily to maintain and possible to repair, its life cycle is extended and technical components and materials keep circulating and contributing to the economy.
This type of economy has its benefits on the environment resulting from less greenhouse gas (GHG) emissions, lower primary consumption, better land health and productivity with nutrients returning to the soil, and reduction of negative externalities such as air pollution and climate change, among many others.
At the same time, circular economy brings opportunities for companies including bigger profits when input costs are reduced, lower volatility of raw material’s prices and lower fragility of the supply chain to natural disasters. Additionally, new business services can be created and customer interaction and loyalty can be strengthened.
The new Corporate Sustainability Reporting Directive (CSRD) aims to shift the current linear economy to a circular one and includes a specific standard that connects companies’ resource use with their sustainability performance - the European Sustainability Reporting Standard (ESRS) E5. Such standard specifies disclosure requirements on resource consumption, circular design, waste generation and recovery of materials and products. By reporting on circular performance, companies reinforce transparency and enable comparison with other enterprises, gaining competitive advantage.
Let’s take a look at the disclosure requirements of the ESRS E5:
E5-1: Policies related to resource use and circular economy:
It disclosures the policies implemented by the company related to circular economy: the enterprise should indicate whether and how its policies address transitioning away from the use of virgin resources and how it contributes to the regenerative production of renewable resources and the regeneration of ecosystems.
E5-2: Actions and resources related to resource use and circular economy:
It explains the enterprise’s circular economy-related actions and resources allocated: the enterprise must specify whether its actions relate to the waste hierarchy or whether they have a more detailed circular economy strategy throughout the value chain (refuse, rethink, reduce, reuse, repair, refurbish, remanufacture and repurpose, recycle).
E5-3: Targets related to resource use and circular economy:
It communicates the targets the company has adopted to support its resource use and circular economy policy: the enterprise must specify whether and how its targets relate to inflows and outflows (including waste, products and materials) and also to which layer of the waste hierarchy the target relates to.
E5-4: Resource inflows:
It describes the material inflow used in the course of the company’s own operations and value chain: the enterprise must include the use of sustainably sourced biological materials, non-virgin, reused or recycled materials and also information on how data is calculated.
E5-5: Resource outflows:
It reports information on the enterprise’s material resource outflows, including waste and explains how the company contributes to a circular economy and outlines the waste management strategy: the enterprise shall disclose information on durability, repairability and rates of recycled content.
E5-6: Potential financial effects from resource use and circular economy-related impacts, risks and opportunities:
It describes the potential financial effects due to material risks and opportunities resulting from resource use and circular economy-related impacts and dependencies: the company must disclose a quantification of the potential financial effects in monetary terms, or when this is not possible qualitative information.
The Bottom Line:
If your company falls into the categories listed here, circular economy will be a key part of your disclosure process. The transparent, standardized mapping exercise will promote the achievement of a sustainable circular economy. Practices such as waste reduction, diminishing reliance on resource extraction, and substantial cuts in carbon emissions can significantly contribute to this transformative process.
It is worth noting that circular economy principles involve new ways of thinking and new types of business decisions. Nowadays, most companies do not integrate circular practices into their business strategy, thus one of the first steps is to identify how circularity can be integrated to go over and above compliance and accomplish behavior change.
The EU Corporate Sustainability Reporting Directive (CSRD) is one of the biggest regulatory efforts to push the adoption of ESG strategies and targets and the circular economy plays a vital role in it. By prioritizing practicality, optimizing data systems, green design and gaining insights into the supply chain, companies can proactively ready themselves for CSRD disclosures. This sets the groundwork for widespread adoption of circular business models, a pivotal driver in the battle against climate change.
Sources
EFRAG. (2022). Draft European Sustainability Reporting standards - resource use and circular economy. https://efrag.org/Assets/Download?assetUrl=%2Fsites%2Fwebpublishing%2FSiteAssets%2F12%2520Draft%2520ESRS%2520E5%2520Resource%2520use%2520and%2520circular%2520economy.pdf
Ellen MacArthur Foundation. (2015). Towards a circular economy: Business rationale for an accelerated transition. https://www.ellenmacarthurfoundation.org/towards-a-circular-economy-business-rationale-for-an-accelerated-transition
European Comission. (2020). A new Circular Economy Action Plan For a cleaner and more competitive Europe. https://eur-lex.europa.eu/resource.html?uri=cellar:9903b325-6388-11ea-b735-01aa75ed71a1.0017.02/DOC_1&format=PDF
Nußholz, J. (2022). A Game-Changer for the Circular Economy transition: Mandatory sustainability reporting on Resource Use and the Circular Economy with upcoming ESRS 5 [LinkedIn], https://www.linkedin.com/pulse/game-changer-circular-economy-transition-mandatory-resource-nu%C3%9Fholz/
